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Leasing, Ability to Repossess, and Debt Capacity

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Author Info
Andrea L. Eisfeldt
Adriano A. Rampini

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Abstract

This paper studies the financing role of leasing and secured lending. We argue that the benefit of leasing is that repossession of a leased asset is easier than foreclosure on the collateral of a secured loan, which implies that leasing has higher debt capacity than secured lending. However, leasing involves agency costs due to the separation of ownership and control. More financially constrained firms value the additional debt capacity more and hence lease more of their capital than less constrained firms. We provide empirical evidence consistent with this prediction. Our theory is consistent with the explanation of leasing by practitioners, namely that leasing "preserves capital," which the academic literature considers a fallacy. The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/rfs/hhn026
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Publisher Info
Article provided by Oxford University Press for Society for Financial Studies in its journal The Review of Financial Studies.

Volume (Year): 22 (2009)
Issue (Month): 4 (April)
Pages: 1621-1657
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Handle: RePEc:oup:rfinst:v:22:y:2009:i:4:p:1621-1657

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  1. Efraim Benmelech & Nittai K. Bergman, 2008. "Liquidation Values and the Credibility of Financial Contract Renegotiation: Evidence from U.S. Airlines," NBER Working Papers 14059, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Efraim Benmelech & Nittai K. Bergman, 2008. "Collateral Pricing," NBER Working Papers 13874, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
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